Opinion & Analysis
Kara Gammell: How IP can help you plan ahead for peace of mind
03 Apr 2019
Last week, I was at my five-year-old daughter’s class assembly. I was looking around the room at the other parents, thinking that we would spend the next six years attending these types of events together – when it hit me that it may not be the case for all the adults in the room: figures from the Childhood Bereavement Network estimates that every 22 minutes in the UK, a parent dies leaving dependent children. By the age of 16, one in twenty young people will have had a parent pass away. In my daughter’s class of 30, those odds felt terrifying.
Being a personal finance journalist, I couldn’t help but wonder how many of these parents had adequate insurance in place should the worst happen?
Did these parents have life cover and income protection insurance? Did they understand that they are more likely to suffer from a serious illness than they probably assume.
It’s a grim thought, but sadly it is reality: each year, one million people in the UK find themselves unable to work due to a serious illness or injury, according to the Association of British Insurers (ABI).
What’s worse is that there are just over three million income protection policies in force – a type of policy that pays vital bills in the event of prolonged periods unemployment due to poor health.
While I sat in the assembly, waiting for our children to make their way to the stage, I considered how many of these families would lose their home to a fire, for instance. A quick Google search later that day revealed the good news that this is statistically unlikely to happen: government figures show that just 1% of households in England had a fire at home in the last two years.
Though, through a little digging, I found out that nearly three-quarters of us have home insurance – which, of course, is very sensible, but shows that if we were looking at our insurance coverage based on odds of actually needing it, we were backing the wrong horse so to speak.
This all might sound a bit dramatic rather melancholy – I was about to watch a class of Year One boys and girls preform a jungle boogie, after all – but I know first hand what is it is like to be a child with a parent with a serious illness. In fact, it wasn’t just one, but both of my parents had such severe ill health that meant that in their forties, they became unable to work. My father, once a secondary school headmaster, developed severe heart problems when he was 42 and my mother, who owned a successful children’s nursery, developed Multiple Sclerosis in her early 30s, and eventually stopped working at the age of 48. As a result, I have never taken good health for granted.
Fortunately, my folks had taken out income protection insurance cover before illness occurred, so our household, while rocked by the changes caused by their early retirement, we were able to continue our very comfortable lifestyle – we were not forced to move home, and possibly schools, which as a child of 12 who was starting to navigate my way through the teenage years, was a huge comfort.
So it is no surprise that when our daughter Audrey was born in 2013, my husband and I chose to provide the same type protection for our family and increased our existing insurance coverage through Lifesearch, the protection specialists.
We have opted for a mix of cover – some to provide a lump sum in the event of our death and Family Income Benefit, which will pay a tax-free monthly income for our daughter, until the age of 21. Both of which are as single life plans rather than joint life, meaning both policies would pay out should both of us pass away.
We also have decreasing life insurance cover on our mortgage, where the payout will shrink in line with the amount left owing on our repayment mortgage, protection to provide a monthly income if we are too sick to work and critical illness insurance.
Naturally, we want our estate to be left to our daughter, but we had concerns about what might happen before Audrey was mature enough to make sound financial decisions. As a result, we set up a trust into which our life insurance and Family Income Benefit would be paid.
A trust is a legal entity that holds assets on behalf of the beneficiary and appoints a trustee – my sister in our case – to distribute them according to your instructions. For instance, we have instructed the trustee to make regular monthly payments from the trust our daughter so the inheritance can’t be spent all at once.
However, it seems that this assurance doesn’t come cheap these days: with policies for everything from income protection, critical illness, life insurance and family income benefit, we spend a whopping £203 each month.
However, for me, the peace of mind that my family is protected is priceless.
Luckily, we had taken out most of our policies at the tender age of 29 – when we were younger and healthier than we are today, both quickly approaching 40. This means that are premiums are cheaper than they would have been other wise. What’s more, we have fewer exclusions on our policies, which is a relief.
But, the aforementioned ABI figures show that my husband and I are in the minority when it comes to financial protection – especially considering our age when we took out the original cover.
Many advisers acknowledge that income protection is a hard sell, but research from Royal London has found the under-35s are a particularly difficult market to crack.
The firm found 74% of advisers felt younger people were addressing their protection needs too late in life, while 43% said they struggled to attract clients under 35.
Its seems that younger people are more likely to protect their mobile phones than their income, so what can the industry do to increase take up?
The Royal London research suggests there are several barriers to younger people buying income protection, such as perceptions that because they are young and healthy, they do not need it and it is too expensive.
A further barrier is that government support would be enough to help keep food on the table and a roof over our head.
Most people dramatically overestimate the amount of state aid they will receive if they are taken ill: all you will be entitled to is maximum of just £145 a week in Personal Independence Payment benefits. Not exactly enough to cover all your expenses.
What’s more, research from Scottish Widows reveals that 60% of women in the UK with dependent children have no life cover, leaving their families in a precarious situation if the worst were to happen.
The research also shows that only 13% of mums have a critical illness policy, leaving many more at risk of financial hardship if they were to become seriously ill.
The research from Scottish Widows also suggests that many mothers are underestimating the financial value of their role within the household. Almost a quarter admit that they’ve not taken out life insurance because it’s not a financial priority or they don’t think they need it.
But even in a two-income family, the loss of either parent would have extremely serious implications.
Parents depend on each other in all sorts of ways that go beyond earning an income and paying the bills. In many cases, the surviving parent would have to leave their full-time job to care for the kids. Or if they choose to continue to work, the extra childcare needed would become very expensive.
HOW MUCH IS ENOUGH?
So how can you ensure you are properly protected should you find yourself out of work due to an accident or sickness? How much cover is enough? And how much does it cost?
How much you need depends mainly on your circumstances and what you want to achieve. The general rule is that it should be enough to pay off any debts when you die and provide money so your partner and any children will be financially secure.
Like any insurance, it is crucial that you shop around before you purchase a policy. Never assume that your bank or broker will offer you the best deal as many are usually tied to just one provider and can be very expensive.
Policies are priced according to your age, general health and the amount you want to receive if you must make a claim. When calculating how much cover you need, it makes financial sense to consider all the monthly outgoings you pay every month.
As well as your mortgage, rent or loan commitments, you must include those everyday essentials such as council tax, utility bills and the weekly food shop. Fail to do so and you could still end up in debt trying to meet your other commitments.
But how much will it cost I hear you ask? A 35-year-old looking for income protection of £1,500 a month can expect monthly premiums of £26.79 with Legal & General. Life insurance worth £100,000 over 25 years, would cost £6.50 a month from AIG.
Financial experts agree that due to society’s increasing life expectancy, it is crucial to think past traditional retirement age or your mortgage term when taking out a protection policy to ensure that you will be adequately covered for the duration you require.
It is also worth considering the changing state pension age as it increases for both men and women to 66 by October 2020. It will rise again to 67 between 2026 and 2028.
While these types of insurance policies complement each other, they do different things and cover different risks so it is important to carefully consider both before making a purchase. If you have a heart attack, for instance, and return to work after six months, a critical illness policy would have paid the lump sum, where income protection payments would stop when you go back to work.
When it comes to choosing an income protection policy, consumers should look to insure their “own occupation” – claimants who are unable to do their own job – rather than any work at all because they fall ill. Luckily, this type of cover, while offering better protection, may not be costlier as it is factors such as age, smoking, occupation, length of policy and amount of cover that determines the premium.
Get the most for your premiums and opt for two single policies rather than joint cover if you are in a relationship. Despite higher premiums of roughly 10%, these two policies can pay out twice, whereas a joint policy will only ever pay out once.
Be completely honest in your answers to all the questions on the application, for example your medical history, otherwise the policy could be worthless.
You might feel that you are having to give far too much information, but if you hold something back it could really affect whether the insurer pay out in the event of a claim.
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